The question has suddenly become one of great imports for investors and traders the world over: just what will become of Evergrande, the world’s most indebted real estate developer.
China’s property prices have been steadily rising over the last 2 decades, and as can be expected when such financial creep happens, real estate became unaffordable to most. And this has been happening on the Chinese government’s watch, as it allowed firms like Evergrande easy access to lines of credit. Fueled by this, they purchased real estate en masse.
But this buying spree had a massive downside; it created an artificial scarcity of demand, as supply of these limited land parcels started to get restricted. This led to soaring property prices. And so, an audit by the Chinese government revealed what many suspected; companies such as Evergrande had breached the credit limits set for them, and Evergrande themselves have liabilities to the tune of $300 billion. In the wake of this, Beijing introduced new rules to control the liabilities owed by major real estate developers.
Why does this seem familiar?
If this feels like a deja vu moment, that’s because it is. It has shades of the Lehman Brothers crisis, when the once mighty investment bank crumbled under the weight of its total debt, sparking the great financial crisis of 2008. In fact, closer to home, it can even be likened to IL&FS’ collapse.
Similar though this might be, Evergrande can’t be allowed to just die an undignified death. The ripple effects will be felt far and wide. Suppliers await payments, banks anxiously look on as their loans hang in the balance, and the humble homebuyer just wants the home they’ve paid for. There’s a lot at stake.
So what now?
With over $7.4 billion of bond payments due to be paid in 2022, and large interest payments looming for repayment in September, this is a crisis moving into high gear.
It is felt the Chinese government will step in and bail out Evergrande, but experts believe that since Chinese markets aren’t as deeply interlinked as those in the USA, the potential shuttering of Evergrande would have limited repercussions, and certainly nothing as bloody as the scenes in 2008. However, with deep ties to financial institutions and millions of homes hanging in the balance, not to mention livelihoods, a collapse would savage the Chinese economy.
And so, the government that saw over this crisis faces a terrible decision: grant a bailout, and be seen as condoning the financial excesses that saw this come to pass. Or refuse to act, and send systemic shocks through an economy that is just shaking off the aftereffects of COVID-19.
For now, it’s interesting to see how the Evergrande story plays out.